Supreme Court, Appellate Division, First Department, New York.
SCHACK et al.
v.
HANDEL et al.
May 31, 1946.
 Appeal from Supreme Court, New York County; Irving L. Levey, Justice.
 Proceedings in the matter of the application of Goldie Schack and another for 
an order requiring Samuel Handel and Louis Handel, individually and as 
copartners doing business as Handel Sportswear, and others to show cause why 
emergency rents being paid by them should not be increased.  From an order 
directing payment of increased rents, petitioners, named respondents, and 
certain other respondents appeal.
 Affirmed.
West Headnotes
[1] Landlord and Tenant  200.24
233k200.24 Most Cited Cases
    (Formerly 233k200(11/2))
In determining reasonable rent under Emergency Commercial Rent Law, probable 
life of improvements having some degree of permanency should be considered in 
fixing amount to be charged in particular year as extraordinary expenses of 
repairs which would not ordinarily recur annually.  McK.Unconsol.Laws, § §  
8522(k), 8524.
[2] Landlord and Tenant  200.28
233k200.28 Most Cited Cases
    (Formerly 233k200(11/2))
Actual experience should be given great weight in fixing probable cost of 
maintenance and operation of leased premises for purpose of determining 
reasonable rent thereof under Emergency Commercial Rent Law, but it does not 
require court to accept concise sums spent in particular year for such items as 
cost of same items during years of emergency for which rent is being fixed. 
Mc.K.Unconsol.Laws, §  8524.
[3] Landlord and Tenant  200.24
233k200.24 Most Cited Cases
    (Formerly 233k200(11/2))
An allowance for depreciation of leased building is not true item of cost of 
maintenance or operation thereof within Emergency Commercial Rent Law requiring 
consideration of such cost in determining reasonable rent. McK.Unconsol.Laws, §  
8524.
[4] Landlord and Tenant  200.28
233k200.28 Most Cited Cases
    (Formerly 233k200(11/2))
The Emergency Commercial Rent Law, requiring consideration of cost of 
maintenance and operation of leased property, including amounts paid for taxes 
and services furnished, confines such cost to sums actually paid out or 
incurred.  McK.Unconsol.Laws, § §  8522(k), 8524.
[5] Landlord and Tenant  200.28
233k200.28 Most Cited Cases
    (Formerly 233k200(11/2))
In determining amount allowable for taxes on leased premises as expense of 
maintenance and operation to be considered in determining reasonable rent under 
Emergency Commercial Rent Law, trial court properly considered tax reductions 
made by Supreme Court for earlier years in certiorari proceedings such as were 
pending for year involved.  McK.Unconsol.Laws, §  8524.
[6] Landlord and Tenant  200.28
233k200.28 Most Cited Cases
    (Formerly 233k200(11/2))
Owners, not tenants of commercial premises have right to fix commensurate amount 
of fire insurance to be carried by tenants and may consider rise in building 
costs in insuring property, so as to authorize allowance of amount of premiums 
paid for fire insurance thereon as item of cost of maintenance and operation in 
determining reasonable rent under Emergency Commercial Rent Law, though amount 
of such insurance exceeds structural value or cost of reproducing insured 
buildings, if amounts expended for premiums are not unreasonable, arbitrary or 
capricious.  McK.Unconsol.Laws, §  8524.
[7] Landlord and Tenant  200.24
233k200.24 Most Cited Cases
    (Formerly 233k200.23, 233k200(11/2))
The provision of Emergency Commercial Rent Law that net annual return of 6 per 
cent. on fair value of entire leased property, including land, plus 2 per cent. 
of principal for amortization of mortgages thereon, is presumed to be 
reasonable, does not require that actual payment of less than 2 per cent. 
amortization shall control issue of reasonable return, but such presumptive 
percentages are merely aids in determining prima facie reasonable return. 
McK.Unconsol.Laws, §  8521 et seq.
[8] Landlord and Tenant  200.24
233k200.24 Most Cited Cases
    (Formerly 233k200.23, 233k200(11/2))
The burden imposed by rent increases, granted under Emergency Commercial Rent 
Law, should be apportioned as against each tenant of leased premises, giving due 
consideration to amount and character of space occupied by each of them and 
return from entire premises.  McK.Unconsol.Laws, §  8524.
[9] Evidence  571(7)
157k571(7) Most Cited Cases
Where testimony of expert witness, called by tenants of various lots in three 
adjoining buildings operated as single unit by same landlords, that lofts in 
each building were of same rental value, was all the proof introduced on such 
subject, court properly apportioned increased rent granted landlords among 
tenants accordingly.  McK.Unconsol.Laws, §  8524.
 **409 *4 Leon Himmelfarbe, of New York City, for petitioners appellants- 
respondents.
 Dreyer & Traub, of Brooklyn (I. Nathanson, of Brooklyn, of counsel; Samuel 
Kirschenbaum, of Brooklyn, on the brief), for respondents-appellants Samuel 
Handel and others.
 Leo J. Linder, of New York City (Stanley J. Mayer, of New York City, of 
counsel), for respondent-appellant Zell Products Corporation.
 Milton Koerner, of New York City, for respondents-appellants Custom Bilt Shirt 
Co., Inc., and Louis Rosenthal.
 Before MARTIN, P. J., and TOWNLEY, GLENNON, CALLAHAN, and PECK, JJ.
 CALLAHAN, Justice.
 The petitioners, who are landlords of three adjoining buildings operated as a 
single unit and known as 530 Broadway, New York City, applied to the Supreme 
Court for an order requiring the tenants occupying commercial space in said 
premises to show cause why the emergency rents being paid by said tenants should 
not be increased.  There are four stores in the premises.  Two of the stores 
were used for retail business.  These tenants were not made parties for the 
reason that the proceeding was commenced before the adoption of Chapter 314 of 
the Laws of 1945, McK.Unconsol.Laws, §  8551 et seq., extending the emergency 
rent laws to retail stores.  The two remaining store tenants were conducting 
enterprises therein which came within the Commercial Rent Law. 
McK.Unconsol.Laws, §  8521 et seq.  They were made parties, but one of them has 
settled his dispute with the landlords.
 Special Term computed the gross emergency rents of the premises at $64,726.60, 
fixing the same at 15% above the gross rentals as of March, 1943.  It found that 
the reasonable allowable income should be $68,398.09 and directed a payment of 
increased rents by each of the tenants who were parties.
 In determining the proceeding the Trial Court made specific findings concerning 
the reasonable value of the property, the cost of maintenance **410 and 
operation thereof, and the amount of unpaid mortgage.  It added the reasonable 
expense for maintenance and operation to an allowance which it made of 6% of the 
value found and 2% of the unpaid mortgage, and thus computed at the figure of 
$68,398.09 above mentioned.
 *5 Both the landlords and the contesting tenants appeal, advancing numerous 
assignments of error.  Both sides complain of the valuation arrived at.  The 
landlords contend that the expenses for operation and maintenance as determined 
by the court are insufficient.  The tenants contend that the allowance of 2% 
amortization was improper.  Some of the tenants further contend that the 
increased rents plus the rent from the three stores, the tenants of which are 
not parties, would exceed the allowable income fixed by the court.  Some further 
contend that the increases allowed were improperly apportioned as between 
tenants.  We will discuss these various claims of error in the order mentioned.
 The Trial Court fixed the fair value of the premises at $400,000.  Although the 
findings declare this sum to be the value of the buildings, it seems clear that 
the court intended to include land and buildings in such valuation.  The 
assessed valuation for the year 1944-45 for tax purposes was $515,000. 
Certiorari proceedings were pending in which the petitioners were seeking to 
reduce that assessment.  Petitioners purchased the properties herein on April 1, 
1944, for $345,000.  The assessed valuation for the year 1943-44 was $535,000, 
but this figure had been reduced by the Supreme Court in certiorari proceedings 
to $392,000.  The assessed valuation for 1942-43 had also been reduced to 
$402,000 in certiorari proceedings.
 Considering all of the circumstances, and giving due weight to testimony of the 
expert witnesses called by both sides, we are of the opinion that the valuation 
fixed by the Trial Court of $400,000 was warranted by the evidence.
 Numerous items of the expense of maintenance and operation as fixed by the 
court are complained of by the landlords.  They, as petitioners, introduced 
evidence of the alleged actual costs of operation during a year after they 
acquired the premises, and for several years prior thereto when it was in other 
ownership.  The Trial Court disallowed some items of expense which had actually 
been incurred, and reduced others.  Three items of expense which were eliminated 
by the court seem proper items, but the aggregate amount thereof is so small 
that we will not discuss them in detail as their omission did not substantially 
change the result arrived at.
 The Trial Court sharply reduced amounts claimed as expenses for repairs, 
plumbing, painting, elevator repairs, decorating, and supplies.  It allowed a 
single sum of $2500 to cover all these items as against petitioners' claimed 
disbursements of $10,471.64 therefor.  The tenants' expert witness estimated 
$4,200 would be required to cover these items.
 *6 The Commercial Rent Law provides, see §  4, Chap. 3 of the Laws of 1945, as 
amended by Chap. 315, Laws of 1945:  '* * * In the determination of the amount 
of such reasonable rent:  (a) due consideration shall be given to the cost of 
maintenance and operation of the **411 entire property (including land and 
building in which such commercial space is located) including amounts paid for 
taxes assessed against such property, and to the kind, quality and quantity of 
services furnished, but excluding amortization or interest paid or accrued on 
any incumbrances thereon * * *.'
 Subdivision (k) of section 2 of the same statute defines 'services' to mean:   
"Services.'  Repairs, decorating and maintenance, the furnishing of light, heat, 
steam, hot and cold water, telephone, elevator service, cleaning service, linen 
service, janitor service, the removal of refuse and any other facility or 
privilege connected with and furnished by the landlord for the use or occupancy 
of the commercial space.'
 [1]  It will thus be seen that the statute requires that due consideration be 
given to the cost of maintenance as well as that of operation in fixing a 
reasonable rent.  Here, however, several of the repair items claimed were 
expenses of an extraordinary nature which would not ordinarily recur annually. 
The probable life of improvements having some degree of permanency should be 
considered in fixing the amount to be charged as expenses for such items for a 
particular year.
 [2]  Of course, actual experience should be given great weight in fixing the 
probable cost of maintenance and operation, but we do not construe the statute 
to require the court to accept the precise sums spent in a particular year as 
the cost of the same items during the years of the emergency for which the rent 
is being fixed.  For example, in the present case the court might well have 
allowed but a fraction of the sum claimed for such items as a new roof, change 
of heating equipment and various elevator alterations.  Accordingly, we hold 
that while a substantial reduction of petitioners' claim for repairs, etc., was 
warranted on the proof, a figure at least as high as that estimated by the 
tenants' witness ($4,200 yearly) would have been more in keeping with the 
evidence as the probable cost of repairs.
 [3][4]  An item which the petitioners-landlords claim should have been included 
in the cost of operation, but which the trial court omitted, was one for 
depreciation of the building.  We find that the Trial Court was correct in 
omitting this item.  An allowance for depreciation would not be a true item of 
the cost of maintenance or operation of a building.  Reading the present statute 
as a whole, we hold it was the legislative intent to confine the *7 cost of 
maintenance and operation in proceedings of the present nature to sums actually 
paid out or incurred.
 Under earlier 'rent' laws, see L.1920, chs. 136, 944, and subsequent 
amendments, depreciation was permitted to be taken into consideration in fixing 
reasonable rents.  See Hall Realty Co. v. Moos, 200 App.Div. 66, 192 N.Y.S. 530; 
Nod-Away Co., Inc., v. Woehr, 209 App.Div. 907, 205 N.Y.S. 579.  But the scheme 
of the earlier statute differed substantially from that followed in the present 
laws.  Under the earlier rent laws unjust, unreasonable and oppressive rents 
were prohibited and the courts were authorized to fix a fair rent.  No emergency 
rent was fixed by statute.  Under the present emergency laws rents are to be 
maintained at the rate paid on March 1, 1943, plus 15%. **412 In order to fix a 
higher rent an application to increase must be submitted to the Supreme Court or 
an arbitrator.  While the item of depreciation may be considered by the court or 
arbitrator upon an application to increase rents in determining what is a fair 
return, this does not mean that the court or arbitrator must include any sum for 
depreciation as an item of cost of maintenance or operation of the premises.  It 
would seem rather that the legislature had taken depreciation into consideration 
in the presumptively fair return of 6% and 2%.
 [5]  Petitioners complain that the Trial Court, in fixing the item of taxes as 
an expense, allowed less than the actual taxes.  In doing so the court took into 
consideration the results obtained in the certiorari proceedings relating to 
earlier years, and that like proceedings were pending for the year 1944-45. We 
consider it was within the province of the Trial Court to give consideration to 
these facts in determining the proper amount to allow for taxes.
 [6]  Another expense item complained of was the sum allowed for cost of 
insurance.  The buildings were insured against fire for $500,000, although 
petitioners' expert computed the structural value or cost of reproduction as of 
1941 at $345,000.  The total of premiums paid amounted to $1139.82.  The Trial 
Court reduced this sum to $1000.  Petitioners claim that the owners and not the 
tenants should have the right to fix the commensurate amount of fire insurance 
to be carried, and that the owners might take into consideration the present 
rise in cost of building in insuring their property.  With this contention we 
agree as a general statement of the principle that should govern proceedings of 
the present nature, as long, at least, as the amounts expended are not 
unreasonable, arbitrary or capricious.
 *8 [7]  This brings us to a consideration of the item complained of by the 
tenats, namely, the item of 2% amortization of the outstanding mortgage. In the 
present case the owners were actually paying only 1% amortization.  The tenants 
contend that for this reason the court should have allowed only 1%.
 We think that the parties misapprehend the effect of the provisions of the 
statute with respect to the figures of 6% return and 2% amortization.  The law 
says that upon application to increase rents the court or arbitrator shall 
determine the reasonable rent based on the fair rental value of the tenant's 
space.  A net annual return of six per centum on the fair value of the entire 
property, including the land, plus two per centum of principal for amortization 
of any mortgages thereon, is presumed to be a reasonable return.  However, the 
statute fixes as the measure of allowable rent in all cases a sum that would 
produce a reasonable return to the owner.  The statute does not make the 6% or 
the 2% a precise measure of the return nor does it make said percentages the 
maximum or minimum return.  They are figures as to which a statutory presumption 
of fair return is created.  The statute does not require that the actual payment 
of less amortization than 2%, or perchance payment of a greater amount of 
amortization, shall control the issue as to what is to be allowed as a 
reasonable return.
 **413 It is clear that the statute did not intend to provide that a property 
encumbered by mortgages was to be allowed a greater amount as a reasonable 
return than one free and clear of mortgage indebtedness.  If it did, its 
constitutionality might be rendered questionable.  It provides that the question 
to be decided upon each application for increased rents, is what is a reasonable 
rent based on fair rental value.  The presumptive figures of 6% and 2% are 
merely aids in determining what return is prima facie reasonable.
 In Matter of Frankel (Hatters' Oakhide Boxes), 269 App.Div. 531, at page 533, 
56 N.Y.S2d 316, at page 318, we said:  'While the court is to determine what 
constitutes a reasonable rent for the commercial space, the amount is to be 
arrived at by a mathematical computation in accordance with a formula set forth 
in the law.'
 In that case the only proof introduced was on the part of the landlord.  We 
held, in effect, that the formula set forth in the statute as indicating the 
presumptively fair return should be followed in the absence of other proof.
 [8][9]  Some of the tenants complain that in fixing the amount of increased 
rent for the various lofts the court did not take into consideration the 
comparative value of same.  The statute says, *9 §  4:  '* * * (b) such rent 
shall be fixed in such a manner that it shall not exceed a fair and reasonable 
proportion of the gross rentals from all the commercial space in the entire 
building, giving due consideration to the amount and character of the commercial 
space used or occupied by such tenant, provided, however, that the gross rentals 
from all such commercial space shall not exceed a fair and reasonable proportion 
of the gross rentals from the entire building.  * * *'
 In a proceeding under section 4 of the Commercial Rent Law, the burden imposed 
by any increases granted should be apportioned as against each tenant, giving 
due consideration to the amount and character of the space occupied by it, and 
the return from the entire premises.  Here the Trial Court fixed the reasonable 
rental value of all lofts in each of the three buildings alike, varying the 
amounts in the different buildings, but making no distinction (except in one 
instance) as between the respective lofts in each building.  The lofts within 
each building were alike in area, but differed in size in the various buildings.  
The expert witness called by the tenants testified that lofts within each 
building were of the same rental value.  This appears to be all the proof 
introduced on the subject.  It would, therefore, seem that the court apportioned 
the increased rent on the basis of the evidence.
 Some tenants contend that, taking into consideration the rents of the three 
stores, the tenants of which are not parties, the amount of gross income would 
exceed the $68,398.09 fixed by the court as the allowable rent.  As we read the 
record the Trial Court allowed $52,560 as the gross allowable income from the 
lofts, and $7500 as like income from a store used for commercial purposes. This 
would make a total of $60,060.  To this would have to be added at least an 
amount equal to the emergency rents for the three remaining stores, which we 
compute **414 at $10,695, or a grand total to $70,755 as allowable income. 
Taking into consideration the increase for cost of operation to the extent which 
we have indicated herein, we find that $70,755 would represent the fair return 
from the whole premises based on reasonable rental value, and that the increases 
of rents as imposed by Special Term were, therefore, substantially correct.
 The final order should be affirmed with one bill of costs to the tenants- 
respondents-appellants, Samuel Handel and Louis Handel, individually etc., et 
al., Zell Products Corporation, and Custom Bilt Shirt Co., Inc., and Louis 
Rosenthal.
 *10 Order unanimously affirmed with one bill of costs to the tenants- 
respondents-appellants, Samuel Handel and Louis Handel, individually, etc., et 
al., Zell Products Corporation, and Custom Bilt Shirt Co., Inc., and Louis 
Rosenthal.  Settle order on notice with corrected findings in accordance with 
opinion.  All concur.
62 N.Y.S.2d 407, 271 A.D. 1
END OF DOCUMENT

 
							